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National Observer Home > No. 52 - Autumn 2002 >Articles

Trade and Industry Policy for the Years Ahead

Colin Teese

“The best Trade and Industry policies are none” — that was the view of one internationally well-regarded Australian economist (obviously a globalist) back in the nineteen-eighties. That remark came when the idea of “globalization” and unfettered market economies was gathering momentum.

At that time the observations were regarded as flippant. A generation later, at least in Australia, nobody was laughing: that view had, effectively, become a reality.

Truly there appears to be now no Australian industry policy. And neither side of politics seems moved to create one. One side of politics clings to an ideology of free trade and the unfettered market as its article of economic faith. Despite the mounting body of evidence to the contrary, it still clings to that idea as the best (or only?) means of maximizing economic gains.

Who knows what the other main party believes. Either it agrees with its opponents, or it dares not disagree out of fear of engaging the wrath of opposing media and academic elites.

Consequently our economy is ever more seriously disadvantaged.

Manufacturing industry is the best measure of a country’s economic status. As a proportion of total output (that is, G.D.P.) ours languishes at the bottom of the O.E.C.D. scale along with Turkey and Greece. Many of our economic ills can be traced back to this decline.

To name some of these ills, not necessarily in order of importance: massive foreign debt; a seemingly incurable deficit on the current account; difficulty in bringing the budget into balance without impoverishing our capacity to deliver basic public services to the community; and an inability to maintain the work force in full time employment. And we should not forget the parlous state of the dollar, and the plight of rural communities.

A strong manufacturing industry would help us deal with these problems. How, one may be tempted to ask?

Put simply, economic growth in Australia depends largely on consumer spending. Because we have given up making most of what we consume, growth brings with it an inevitable surge in imports.

The choices for us are hence simple. We can have growth and prosperity, but only at the cost of mounting current account deficits and accumulating foreign debt. Alternatively, we can bring the current account into balance, and curb the rising foreign debt, but only at the sacrifice of economic prosperity.

Not surprisingly, our politicians go for the former. Any other strategy would see them out of office.

Can we keep on doing this? Yes, so long as others are prepared to continue to lend us money. But as Argentina has found, eventually the time for repayment arrives. That is where the absence of an industry policy may lead us.

Here our trade policy is critical. It was once said that our problems of debt and import imbalance would be dealt with once our trade policy objectives have been met. Why do we not hear that anymore?

There are two reasons.

First, it is now obvious that on even the most optimistic of assumptions about increases in exports, on our present policies they can never cover the cost of imports. Effectively we are condemned to increase foreign debt for as long as we follow present policies; and, of course, until we are called to account for our borrowings.

Secondly, our trade policy, to the extent we have one, is now in tatters.

Since the time of the Hawke-Keating governments the idea has been that free trade and multi-lateral solutions to problems through the World Trade Organisation will look after us.

The high water mark of this approach was the success we were supposed to have had in the 1994 multi-lateral trade negotiations (so-called the Uruguay Round after the country in which they were launched). Especially, much was made of alleged large gains for farmers.

Wildly exaggerated claims of advantages going into billions of dollars were never realized. In fact, from today’s perspective it is doubtful if any benefits at all have accrued to farmers. Both farmers and the rest of us paid a heavy price for these non-benefits.

Australia was required to open its markets fully to imports. This had already been done with manufactures, now it would be the turn of farm products. Also, we were required - or so it was maintained - to give up our traditional support for farmers. This support was unacceptable to our trading partners from whom we wanted – and supposedly would get - concessions.

We met the demands, but none of the promised benefits in return was received by us.

2001 brought with it another round of World Trade Organisation negotiations. And despite the failures of last time we heard the same chant: “Big gains are in prospect for agriculture.”

Oh that they were! And how naïve are we? Our negotiators appear to believe that the United States, Europe and Japan, to name but three, will be obliged to bring their agricultural import policies into line with W.T.O. rules. And, at no cost to us!

Unfortunately, the game is not played that way. What goes on in the W.T.O. is a negotiation. Those pressing for new advantages are expected to pay for them.

Assume for the moment that, against all the odds, the United States, Europe and Japan, in particular are ready to open their markets for to farm products. They will require us to give them some trade or commercial benefit they regard as of equal value. But unfortunately we do not have much to bargain with. All of our tariffs are gone, including those on agriculture. (Mostly they were not bargained off, but given away.)

The other countries know that and are already looking elsewhere for concessions.

They want our quarantine rules on agricultural imports relaxed. They want less rigorously policed rules against unfair import competition – technically called dumping.

As if that were not enough, the United States, at least, wants concessions on the trade in services. In particular, they want us to commit ourselves to allow, for example, American hospitals to set up in Australia. Fair enough, one might say. But of course, they want more; they want equal treatment with Australian hospitals. So if we wished to maintain our public hopitals at less than full patient recovery charges, the government would also have to give the same benefit to foreign owned hospitals. The same would also apply in the case of schools and universities.

Now you might think this will not occur, given the unlikelihood of any shift in farm policies at least from the United States, Europe and Japan.

Let us hope so. But, remember what happened last time. We gave real concessions in return for vague promises on agriculture, which were not kept.

Who is to say we will not do so again?

The hope of concessions on agriculture in Europe, North America and Japan is, indeed, an entirely lost cause. The concern is that our negotiatiors refuse to accept that both Europe and Japan have always placed agriculture outside normal trade negotiations for “strategic reasons”.

We have comforted ourselves with the idea that the United States would be with us in the fight to open up markets in Europe and Japan. But now George Bush Jnr. has declared that United States policy is also to regard farm products as “strategic”. Farm interests will not be bargained away in trade negotiations, he has assured American farmers.

This cosmic shift in United States trade policy has passed almost unnoticed in Australia - perhaps hardly surprising, while Australia’s trade policy consists of little more than a blind faith in free trade and multi-lateral negotiations within the W.T.O.

There is also a naïve belief that somehow our general strategic support for the United States will deliver us trade and economic benefits.

In the Cold War, with a world divided into east and west, our relationship with the United States was driven by political and military realities which made sense. That same situation hardly applies today.

True, the United States has been behind the idea of support for free trade globalization and multi-lateralism which is enshrined in the W.T.O. That is the rhetoric. The reality is that most of the rest of the world, including the United States, is looking to other means by which commercial interests may be pursued.

Regional free trade pacts seem to be the chosen means. There already exists the European Union, which not merely is the one true free trade area, but is the most rapidly expanding. It could well become the United States of Europe, perhaps including Russia. It is exchanging free trade within its membership, but maintaining barriers to the rest of the world.

The North American Free Trade Agreement is another, still growing, arrangement with the same intent. More recently, China has begun negotiating with A.S.E.A.N.

The real possibility is that the world is dividing into three blocks. And while all this is going on Australia is working on some kind of free trade agreement with the United States, which has nothing going for it.

We cannot hope to gain substantially from the United States anything on agriculture. And the trade imbalance in favour of the United States can only be made worse by any new agreement.

For trade reasons we should be looking to strengthen ties in Asia, not because we live in the region, but because of the realities of our trade. Asia takes most of our exports and yet we import most from Europe and North America.

Should we not, in our own interests, be buying more where we sell?

And the politics are even worse. At the present time our closest political ties are reserved for those who serve our trade interests least well. This does not make sense.

Today, we probably would not be welcome at the negotiating table alongside China and A.S.E.A.N. There is a feeling in Asia that we, along with the Japanese, are too close to the United States, and too ready to push American barrows. Asians remember, for example, that at the time of the Asian crisis, when the suggestion was made in Asia for the establishment of an Asian Monetary Fund, Australia immediately jumped in behind the United States to scotch the idea.

It may be that, in the near future, regional trade pacts may be the dominating factor in determining how international trade is conducted. The W.T.O. would, in that circumstance, be marginalized. And where would that leave Australia, with all its eggs in the multi-lateral system?

In that event the only place for Australia to be linked in with would be this Asian region. And yet the fact is that aspects of our foreign policy make it presently difficult for us to be received into any Asian regional pact.

The reality is unpleasantly stark. Either we find closer, comfortable accommodation with the United States across the political and economic fronts, or we adjust to changing circumstances, and are acepted into the councils of Asia as a credible partner.

Almost certainly, in the latter event, the present imbalances in the pattern of our trade will have to be corrected. And that could only be at the expense of Europe and North America.

Difficult times are ahead. When these are considered the peculiar problems which Australia has imposed upon itself in the area of commercial relationships become obvious.




National Observer No. 52 - Autumn 2002